Addressing the LDC infrastructure and investment gaps: Is there a role for GATS commitments?

13 August 2012

In attempting to achieve the Millennium Development Goals, the benefits of improved Least Developed Country (LDC) infrastructure cannot be ignored. Sub-Saharan Africa’s situation is especially severe:  just to overcome the current infrastructure gap within a 10-year period, the annual funding shortfall for low-income African countries is estimated at nearly US$ 19 billion, with the biggest shortfalls for water supply/sanitation (about $9 billion) and electricity ($7.5 billion).

The recent increases in LDC growth did little to improve their investment situation, as noted by UNCTAD: "Investment in the LDCs as a group grew from 20 percent of GDP in 2000 to 23 percent in 2008.  Gross fixed capital formation actually fell in 19 LDCs during the boom years of 2002-2007." An increasingly important mechanism to address the LDC infrastructure gap is public-private partnerships which, in addition to being useful funding sources, can improve efficiency and productivity.

Addressing the gaps

At the 2010 WTO Public Forum, it was noted that "LDCs had less than 1 percent of world infrastructure FDI stocks in 2006, and less than 5 percent of world FDI inflows.  UNCTAD found four reasons to explain why LDCs were marginalised:  multinationals tend to seek high returns; they perceive high risks in LDCs; small local markets are a disincentive; and there is competition from other investment destinations."

The high level of perceived investment risk in many LDCs is reflected in their typically poor ratings across a range of FDI (and other) indexes.   With respect to Africa, Paul Collier has emphasised that governments face numerous disadvantages in attracting investment, leading him to conclude that "A reforming African government thus needs instruments which accelerate the improvement in its international reputation."

Value of GATS commitments

The WTO's World Trade Report 2003 highlights the importance of reliable market access, noting that "trade is likely to expand and be more profitable under conditions of certainty and security as to the terms of market access and the rules of trade."  With respect to services, the gap between the existing investment openness in services and GATS commitments is now very wide.  This is particularly evident when GATS commitments are contrasted with the applied LDC investment regimes reported in the World Bank's Investing Across Borders, which are generally very liberal.

Contrary to common misconceptions, making GATS commitments does not require full liberalisation, or even a guarantee of the status quo.  Considering that, in order to attract FDI, many LDCs have already fully opened a wide range of services sectors under national laws, there may be few remaining domestic legal instruments to highlight their actual policy preferences (e.g. joint ventures).  By investing part of their "policy gaps" in making GATS commitments, governments arguably can help protect their domestic "policy space" – by publicising and making internationally binding their actual domestic policy preferences.

As shown in Chart 1 below, there is an extremely wide variation in the number of existing GATS commitments among the LDCs by subsector, ranging from over 110 (Gambia and Sierra Leone) to only one or two sub-sectors (Burkina Faso, Chad, Madagascar, Mali, and Tanzania).  Additionally, it is striking that, of the current 32 LDC Members of the WTO, 21 have made no GATS commitments in any type of transport services, 20 have nothing in communications services, and 19 have nothing in financial services, despite all being major sectors in which many LDCs are presumably attempting to attract FDI.

Although LDCs are "not expected" to make new GATS commitments – even partial commitments – in the current WTO negotiations, it may arguably be in their interest to do so. By setting an internationally binding minimum level of market access, commitments can increase transparency and legal certainty, helping to reduce investors' fears of country-specific risks and justifying improved investment ratings. Depending on the wording, GATS commitments can also offer positive signals to domestic investors, e.g. by specifying a minimum level of total suppliers rather than only of foreign suppliers. For GATS commitments to be helpful, however, governments will presumably need to publicise them on investment promotion agency websites and in negotiations with investors.

Expect the unexpected?

No single option is evidently sufficient to address the LDC infrastructure and investment gaps; consequently, more holistic approaches are required.  Although GATS commitments alone are unlikely to be enough to increase FDI, it is difficult to see how they could fail to be helpful, especially when used to improve the domestic investment climate and overall credibility of LDC trade policies.

Together with GATS commitments, other mechanisms to improve the international investment ratings of LDCs will presumably include regional commitments, as well as domestic regulatory reforms aimed at obtaining higher rankings in the World Bank's Doing Business index. This was recently demonstrated by Rwanda, which received extensive publicity as the leading reformer of 2010.

The best example to date of the implementation of the ideas expressed in this article is undoubtedly Samoa, which is the highest-ranked LDC on the UNDP's Human Development Index, the second ranked LDC on the Doing Business index, and it has also made extensive GATS commitments.

Author: Dale Honeck, Counsellor, Trade in Services Division at the World Trade Organization.  This article is based on "Expect the Unexpected"?: LDC GATS commitments as internationally credible policy indicators?, The Example of Mali, World Trade Organization, Staff Working Paper ERSD-2011-07, 19 May, 2011 (available online, at http://www.wto.org/english/res_e/reser_e/ersd201107_e.htm).  All views expressed are those of the author and cannot be attributed to the WTO Secretariat or WTO Members.

Cape Verde and the Maldives were LDCs when their GATS commitments were made, but are no longer considered as LDCs by the United Nations.  Vanuatu is not yet officially a WTO Member.

Of course, adequate regulations should be in place before sectors are opened to FDI; the focus in this article is the binding of existing openness.  In addition, making GATS commitments does not interfere with the government's right to reform critical regulations such as non-discriminatory licensing/qualification requirements and procedures, and technical standards.

This article is published under
13 August 2012
The World Bank’s Africa Infrastructure Report concludes that, in addition to suffering from poor quality and coverage, Africans pay rates that are several times higher than in other developing...
Share: 
13 August 2012
Regional Integration Agreements (RIAs) have been used as trade-policy instruments in West African countries since their independence. However, aside from the movements of the production factors, the...
Share: